Planning principles and most common mistakes

Planning is understood as an investment venture or specific action over a period of time.

Pursuant to Article 6(2) of the Act on Shaping the Agricultural System, a natural person personally runs an agricultural holding if he or she takes all decisions concerning the conduct of agricultural activity in the holding (Journal of Laws 2003, No. 64, item 592), and these decisions are related to the supply of means of production as well as the sale of finished products. Knowing the possibilities and limitations of the farm, the farmer should choose the most appropriate type of activity for the given conditions. According to the Code of Good Farming Practice and the principles of Sustainable Agriculture, a properly organised and managed farm should fulfil three basic objectives:

• productive and economic,
• ecological and
• social.

The production-economic objective is to produce a certain amount of agricultural products and to ensure an adequate level of income for the farmer.

The ecological objective, on the other hand, is to make proper use of the natural environment’s resources and maintain its long-term balance.

The social objective is not only to meet the expectations of the rest of society for a beautiful agricultural landscape, but also to maintain the traditions, continuity and action of local communities.

Crop production should be organised according to a specific soil fertility-building rotation and livestock production according to a well-considered and rational herd turnover.

In a sustainable approach to agriculture as a business, planning is very important at every level and over a varied time horizon:

short-term planning – setting the direction and implementation of our activities for the coming season. Formally, short-term planning is the most important in maintaining financial stability, but this is sometimes underestimated by farmers. It is therefore worth keeping an eye on things:

• what stage of the season the farm is at – what’s done and what still needs to be done,
• acreage of individual crops (including planned crops) and expected yields/stock strength and expected production output,
• work schedule,
• the size and timing of the assumed costs and receipts of the activity, together with actual payment dates,
• all additional needs, expenses and receipts with payment dates (including those related to living expenses, renovations, etc.).

medium-term planning – which sets the direction, assumptions and operation of our farm over the next few years. Medium-term planning is linked to development and a possible decision to invest. It is necessary to prepare at least two seasons in advance, to observe the market and its needs, prices and their trends and, above all, to accumulate adequate cash from surpluses generated beforehand.

It is necessary to assess the available resources on the farm. Identification of strengths and weaknesses, ways to eliminate deficiencies. All products in agriculture are produced from a combination of land, labour and capital, using different modes of production, and their elements must be evaluated:

what methods will be used to produce the products on our farm; here it is also necessary to determine the soil and climatic requirements, taking into account the terrain (erosion, sunshine conditions), groundwater levels, soil acidity and class, etc.;

• equipment needed to start up or run production:
• fixed assets, buildings
• machinery and equipment, technology
• office equipment, software
• raw materials and supplies;
• how we will control the quality of the products or services produced;
• what legal requirements we need to meet before starting the business (e.g. obtaining a health permit, training employees).

long-term planning – which sets the direction, prospects and place of our farm in the distant future (covering many years ahead, including the end of our participation in the management and preparation for the transfer of the farm). Long-term planning relates most strongly to the idea of sustainability. This is the place for the most important questions and answers regarding the direction of the farm and the subordination of this development to the requirements of sustainable agriculture. Should we continue to invest, or should we maximise profits on the basis of the potential we already have?

Determining the direction of development or change of farm operations requires a definition:

• objectives of the farm, i.e. the planned structure and production profile,
• necessary funds; any sources that could co-finance investments, such as EU funds, should be checked,
• ways in which it should be done,

while facilitating:

• reducing the negative effects of change,
• setting standards to facilitate monitoring of the plan’s implementation.

Long-term planning involves investment processes. Before launching an envisaged project, it is necessary to properly evaluate it, to determine what resources are needed for its implementation and what benefits can be expected. The proposed project should be examined in terms of its effectiveness, based on feasibility and profitability analyses. It is necessary to observe market trends and the direction in which the market is developing, what consumers’ expectations are and how they will change.

A key issue from the point of view of the long-term development of the farm is also succession, i.e. who will manage the farm in the future. A farm, like any business, needs the next farmer prepared for the task in order to develop properly.

The risk of making mistakes is inherent in every activity, including business. However, it is important that this risk is minimised and that decisions are accurate and based on a thorough analysis of all available information.

The most common planning mistakes that can result in an imbalance or loss of financial stability on the farm are:

Inappropriate scale of investment
This is one of the most common mistakes made. It is mainly due to the desire to develop too quickly relative to the actual possibilities (including facilities, acreage, logistics, manpower, etc.). A typical consequence is a so-called overinvestment, when, for various reasons, the new potential (after the investment) cannot be fully exploited. The barn stands half empty and the greenhouse is underheated. The investment is not working as it should, the income is much lower than planned and loan instalments have to be paid on the total project. Even worse are so-called ‘stock’ investments, to be completed at an unspecified time. Unfortunately, this does not happen in practice, the money is lost irretrievably and the investment deteriorates.

Inappropriate timing of investments
Typical planning error. Every production line has its optimum start time. A delay, e.g. due to rescheduling of construction work, is often difficult to make up. Delays are always unavoidable, so they must be factored into the investment process. If the investment is ready earlier than planned, this does not demolish the plan to start production.

Mismatched financial products
A very serious funding error with catastrophic consequences for financial stability.

• financing of fixed assets with working capital loans Every investment has a payback period. In the case of fixed asset financing, this is at least a few years and most often several years. A working capital loan is admittedly easier to obtain and does not require own contribution, but it must be repaid within a dozen or so months at most. Therefore, it is only used to finance current assets and current needs. If a working capital loan is used for a purpose incompatible with its aim (investment), it will cause serious problems. The investment loan should be repaid from surpluses (pure profit) and not from current income.
• financing business with consumer products. Every product, including credit, has its own characteristics and parameters and should therefore be used for its intended purpose. It is therefore a mistake to finance a farm with cash retail products, which should be used to meet consumer needs.
• working capital financing mainly by means of trade credit. Its share of working capital financing should not be too significant, i.e. it should rather not exceed 20-30% of these needs, as it increases our dependence on the business partner, resulting in a decrease in the negotiating position of the farmer. Secondly, it is costly in a direct way (about 1% per month, i.e. two to three times more than bank financing) and in an indirect way (affecting the price and timing of the sale of our products, the purchase price of inputs). In addition, contracts for such financing, due to the lack of creditworthiness testing, often contain very oppressive and permanently binding clauses, e.g. on collateral. Therefore, if we need financing it is much more efficient to work with a financial partner than with a business partner.

Insufficient own contribution and/or support from third parties without the bank’s knowledge
Own contribution as understood by the lender (bank) is a measure of preparedness for investment. It is a willingness to put up one’s own money, a belief in the idea, but also an assessment of the real possibilities of the farm to generate and accumulate surpluses from the previous period. A lack of own contribution means that the farm is probably not prepared for the investment, which sooner or later will come to light causing very serious financial problems.

Lack of working capital to launch increased production
A situation linked to a lack of own resources as a result of cash being set aside for investment. It can also be a consequence of poor planning, when increasing capacity and production potential does not take into account that this means an increase in the need for resources for this production. In such a situation, additional working capital credit should be applied for as soon as possible for the increased production expenditure.

An imbalance of three key risk factors, consisting of:

Production risk – i.e. lack of knowledge and skills to achieve good results and efficiency in the production process. A method to reduce this risk is increased agricultural education. Regardless of biological and technological advances, the soil still remains the primary site of agricultural production. The results obtained from agricultural production are largely determined by the chemical, physical and biological properties of the soil. The composition of soils undoubtedly influences the quantity and quality of plant and animal products. Comprehensive knowledge of the properties of soils, understanding of the processes that take place in them, proper and rational management of them is the basis for sustainable rural development, including sustainable agricultural production. More in Area 6:, Soil management.

Farmers, in their own interests as well as those of the rest of society, are obliged to protect the environment, and the degree of impact of agricultural production on its quality should be no more than absolutely necessary. More in Area 11: Biodiversity.

Business risk – i.e. the ability and agility to navigate the business environment (optimising inputs and optimising income from the sale of farm products). A method to reduce this risk is increased business education, including legal and financial, marketing, or the use of competent advice. The farmer is an entrepreneur and has to make a number of decisions on a daily basis from:

• budget set-up,
• delegating tasks,
• time management,
• problem solving,
• working as part of a team,
• communicating with colleagues, partners and competitors,
• management and organisation of work.

These skills can be acquired by the farmer through training in personal development.

The primary objective of agricultural advisory services is to assist farmers who may find themselves in a problematic situation by preparing them to solve their problems and to take independent decisions and effective action in doing so.

In addition to the traditional production consultancy, new types of consultancy have emerged, such as:

• advice on agricultural law (relevant, for example, to the legal details of organising producer groups, but also to taxes, insurance, credit, contracts for the purchase of fixed assets, loan agreements, etc.),
• economic consultancy (enabling an economic analysis of the venture, a marketing plan that would include the development strategies adopted and the planned economic effects),
• financial consultancy (very important during product pricing, in transactional negotiations during which the terms of purchase and sale agreements are determined),
• marketing consultancy (how to sell your own products most profitably).

personal and organisational risks – i.e. the health capacity of those working on the farm, the responsibility and ability to manage the business and finances, especially under conditions of rapid production growth. The operating mechanism of the farm should take into account the continuous development of the farm, which takes place in the process of adapting to changes that occur inside and outside the farm. These changes relate to market and technological conditions, as well as to the knowledge, psyche, requirements of employees, etc. The overall knowledge of the enterprise is shared and distributed among all employees and in different groups, but it needs to be properly coordinated in order to become productive. In a company, it is necessary to establish an appropriate knowledge management system, which is described as a mixture of understanding and practice. In today’s economic climate, a learning unit is likely to succeed. The means of selecting employees must be appropriate to the specific job. Job specificity determines the acceptable minimum qualification a potential employee must have in order to perform his or her tasks properly. Job specialisation leads to the most effective use of the various skills of employees.

In the case of agricultural production, one can also speak of ‘agricultural risks’ described as a stand-alone issue below.

Lack of a plan “B”, an “it will work itself out” approach and a mechanism of diminishing self-control

Plan B means having a contingency scenario, a solution for problems and unforeseen events that may occur. Therefore, it is necessary to have ‘just in case’ solutions already prepared in advance in your plans.

The principle of “it will work itself out” must not be applied to important matters, as this usually ends in big losses. It is worth remembering a certain psychological mechanism: with successive risky actions that end well, the decisive person’s self-control decreases – because “it worked again”. This causes a tendency to take even more risks the next time, which sooner or later will end badly.